Pleasant Hill to borrow to pay off some employee pension debt

PLEASANT HILL -- City leaders agreed Monday to borrow money to pay off $4.1 million of pension debt, with the goal of saving more than $700,000 in interest.

The debt is part of the city's share of unfunded liability in the California Public Employees' Retirement System, or CalPERS, as of 2005. That was the year CalPERS merged all retirement plans with fewer than 100 employees into risk pools, including Pleasant Hill's public safety and miscellaneous employees' plans.

The share, known as the side fund, is the difference between the amount set aside to pay future pensions and the actual benefits employees had earned at the time. Pleasant Hill owes $4.1 million for the public safety side fund and $2.8 million for the miscellaneous employees' side fund.

Cities have been paying off their side funds at an annual interest rate of 7.75 percent, which CalPERS reduced to 7.5 percent at the end of June. Payments for the funds are included as part of the employer's CalPERS contribution rate. Pleasant Hill is scheduled to pay off its public safety side fund in June 2024 at a total cost of about $6.2 million.

Just as homeowners have taken advantage of low interest rates to refinance their mortgages, the council plans to take out a loan, in the form of a bond from a private lender, to pay off the public safety side fund.

A bond consultant estimates that a five-year loan at 3.5 percent interest would cost Pleasant Hill about $4.6 million and save the city approximately $717,000 in interest.

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The five years of loan payments will draw the reserve fund down to $6.2 million by June 2017. However, the city staff projects that the savings generated from this approach will replenish the reserve fund to $8.3 million by fiscal year 2020.

Councilman Jack Weir pointed out that the side fund debt doesn't appear as a line item on the city's books, but the loan will.

"This is going to change the way we look financially," Weir said. "Might that affect our credit rating?"

Nicole Tallman, the consultant guiding the city through this process, said the change shouldn't spook credit rating agencies.

"They know you're not taking on new debt, the debt already exists and you're refinancing it to get a lower interest rate," Tallman said.

Councilman David Durant said he is not worried about a credit rating downgrade because Pleasant Hill currently has a high rating, a long-term healthy reserve fund, a history of sound fiscal management and no new debt.

Mayor John Hanecak noted that Pleasant Hill has three large debts -- the two employee pension side funds and the bond used to build City Hall, which is scheduled to be fully repaid by fiscal year 2016. He argued that paying off the side fund is the ethical thing to do, rather than bequeathing the debt to future generations.

This course of action includes some uncertainty because of the mandated 90-day judicial validation process, during which interest rates could increase. Also, Tallman said there is a strong possibility that CalPERS will restructure the side funds in light of the state pension reform legislation Gov. Jerry Brown signed recently.

During the validation period, Tallman's firm will monitor interest rates and any action by CalPERS. The council can cancel the refinancing plan at any time.

Shortfalls in the pension fund are largely a result of lower-than-projected returns on CalPERS investments and higher costs, particularly from the plan that allows police officers to collect a pension of 3 percent at age 50.

As part of the four-year police contract the council approved in July, newly hired officers will be eligible to collect a pension of 3 percent at age 55. Pension payments for new hires also will be based on the average of three years of salary, instead of one.